After November 18, 2022, Hang Seng Index announced its regular third-quarter index adjustment results (the review ends on September 30, 2022, usually within 8 weeks after the date of the review). The adjustment covers major flagship indices of Hong Kong stocks such as the Hang Seng Index, the State-owned Enterprises Index and the Hang Seng Technology Index. There is also a partial adjustment in the Hang Seng Composite Index, which directly determines the investment scope of Hong Kong stocks. The comprehensive analysis of the impact of CICC is for investors' reference.

Index adjustment and impact: Hang Seng Index expanded to 76; Haier Smart Home, Tingyi and China Resources Mixc Lifestyle Services were included

Changes in ► constituent stocks: Haier Smart Home, Master Kang and China Resources Mixc Lifestyle Services are included in the Hang Seng Index; Petrochina Company Limited, Haier Smart Home, ideal and Zhongsheng are included in Hang Seng state-owned enterprises.

1) Hang Seng Index:The adjustment will include Haier Smart Home, Tingyi and China Resources Mixc Lifestyle Services three stocks, with weights of 0.53 per cent, 0.2 per cent and 0.2 per cent respectively; unmarked ones will be removed. After adjustment, the number of constituent shares further increased from 73 to 76.

2) Hang Seng State-owned Enterprises:This adjustment includes Petrochina, Haier Smart Home, Li Auto Inc.-W and Zhongsheng Group, with weights of 1.08%, 0.9%, 0.55% and 0.43%, respectively. At the same time, excluding INNOVENT BIO, Alibaba Health Information Technology, China Gas and Bilibili Inc.-W, the weights were 0.71%, 0.5%, 0.42% and 0.27% respectively. The number of constituent shares remains unchanged at 50.

3) Hang Seng Technology:This time, it was not included and excluded, and the number remained unchanged at 30.

Master Kang and Haier Smart Home on the above list are consistent with our previous preview results, but other targets because the adjustment results of the Hang Seng series index are not entirely based on the published quantitative criteria, it makes it more difficult to predict simply according to the quantitative criteria.

► passive capital flow measurement: pay attention to the positive impact of Haier Smart Home, Kuaishou Technology, China Resources Mixc Lifestyle Services, Kang Shifu, Petrochina Company Limited, etc., and the negative impact on China Gas, INNOVENT BIO, Alibaba Health Information Technology, etc.Based on the Bloomberg summary, the amount of ETF tracking the Hang Seng Index is about $24.64 billion, while the ETF tracking the state-owned enterprises and the Hang Seng Technology Index is about $4.83 billion and $10.27 billion, respectively. Combined with the above components and equity weight changes, we measure the potential passive capital flows. Further combined with the average daily turnover of individual stocks over the past three months, the possible impact of changes in passive funds can be estimated:

1) Hang Seng Index:Haier Smart Home, China Resources Mixc Lifestyle Services and Tingyi, who need the most time for passive capital inflows, are expected to take 4.6,4.5 and 3.7 days. On the contrary, the reset of AIA Group Limited, which exceeds the 8 per cent weight limit (the current weight is 8.27 per cent), is expected to lead to passive outflows of about 0.3 days. At the same time, Hang Lung Properties, Hengan Internationgal Group, MTR Corporation and Hong Kong And China Gas due to the reduction in weight, passive capital outflow also takes about 0.3-0.8 days.

2) Hang Seng State-owned Enterprises:Haier Smart Home, Petrochina Company Limited, Zhongsheng Group and Li Auto Inc.-W need the most time for passive capital inflows, which are expected to bring inflows of US $43.43 million, US $52.11 million, US $207.5 billion and US $265.4 billion, respectively. Among the capital outflows, China Gas, INNOVENT BIO, Alibaba Health Information Technology and Bilibili Inc.-W are excluded, and the existing weights of 0.42%, 0.71%, 0.5% and 0.27% will bring passive capital outflows of US $20.27 million, US $34.26 million, US $24.13 million and US $13.03 million, respectively. It is expected to take about 1.5d, 0.8d, 0.8d and 0.2d.

3) Hang Seng Technology:Due to the increase in weight, Kuaishou Technology-W, Bilibili Inc.-W and Li Auto Inc.-W are expected to receive inflows of US $110 million, US $76.01 million and US $51.36 million respectively. In addition, the weight of XIAOMI and Tencent will be reset to 8% from the current 8.28% and 8.09%, which is expected to bring passive capital outflows of US $28.76 million and US $9.24 million respectively, but the outflow time will be less than 0.3 days.

Characteristics of the adjusted index: Hang Seng Index continues to expand; Hang Seng Index has increased its consumption and real estate construction coverage.

► Index expansion: after this adjustment, the number of constituent stocks of the Hang Seng Index increased from 73 to 76.According to the consultation results released by Hang Seng Index in March last year[1]The Hang Seng Index will increase to 80 by mid-2022 and eventually be fixed at 100, which is still in the process of expanding towards this goal.

► industry representativeness: large consumption and real estate construction market coverage has been improved.With reference to the industry classification of Hang Seng Index companies (that is, seven industry categories), after the adjustment of the Hang Seng Index, the coverage of the real estate construction industry and non-essential and essential consumption has increased from 48.1% and 48.4% to 50.5% and 50.7%, respectively. We expect that with the continuous expansion of the number of constituent shares, the proportion of the new economy will also further increase.

Proportion of ► industry: the proportion of optional consumption has increased significantly.After this adjustment, the market capitalization of the Hang Seng Index has reached 48%, which is close to 0.9ppt compared with the current 47.1%, mainly due to the improvement of 1.1ppt in the optional consumer sector. The proportion of the new economy in the state-owned enterprise index reached 63.4%, compared with 6.26% before the adjustment, with a significant increase in the proportion of optional consumption and energy sectors, while finance and health care accounted for the leading decline.

Adjustment of Hong Kong Stock Exchange Standard: some companies are expected to meet the conditions for inclusion of the Shanghai-Hong Kong Stock Connect.

Since this is a quarterly index adjustment, for the quarterly adjustment of the Hang Seng Composite Index, only stocks that meet the rapid inclusion mechanism will be considered for inclusion. According to the adjustment of the Hang Seng Composite Index, combined with the Hong Kong Stock Exchange to include the requirements, it is expected that some companies will meet.

Adjustment schedule: officially effective on December 5

The above index adjustment results will take effect on Monday, December 5. During this period, some active funds still do not rule out taking certain arbitrage operations according to the results of the adjustment announcement, but the passive funds will choose to adjust their positions on the trading day before the effective date (that is, December 2) in order to minimize the tracking error. We expect that the relevant stocks will be traded at that time or will be much larger than the usual "abnormal volume" situation, especially in late trading.

Chart 1: after this adjustment, the market coverage of the Hang Seng Index real estate construction industry and non-essential and essential consumer industries has increased.

Chart 2: within the Hang Seng Index, the proportion of unnecessary and essential consumption in the Hang Seng Index has increased significantly.

Chart 3: new economy sector accounts for more than 48% after optimization of Hang Seng Index

Chart 4: the proportion of new economy adjusted by Hang Seng China Enterprises Index is 63.4%.